How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. In asia, the monetary authority of singapore mas planned to implement. Excessive levels of interest rate risks in the banking book can pose a significant threat to an institutions earnings and capital base. Authority of singapore mas finalised the local framework for the liquidity coverage ratio lcr in. Director, interest rate risk in the banking book, business. Monetary authority of singapore mas notice 637 14 september 2012 last revised on 31 december 20 notice to banks banking act, cap 19. This risk is a normal part of banking and can be an important source of profitability and shareholder value. As per extant guidelines on management of interest rate risk in the banking book under pillar ii, banks where the economic value of the banking book declines by more than 20% of the mve as a result of a standardised interest rate shock of 200 basis. The higher level of interest rate risk could be a problem once interest rates start rising, and banks and regulators need to closely monitor that risk. Asifma and its members, through the global financial markets association gfma, have already voiced the industrys concerns about the ss 2015 consultation on calculating interest rate risk, as well as the.
Interest rate risk in the banking book risk library. Interest rate risk in the banking book kindle edition by newson, paul. This course covers the nature and functions of money. However, from an earnings point of view, there cannot be an interest rate loss from investing equity in fixed rate assets in order to stabilize earning flows. Sensitivity analysis of irrbb ecb banking supervision. Interest rate risk in the banking book and capital. Irrbb refers to the current or prospective risk to the banks capital and earnings arising from adverse movements in interest rates that affect the banks banking book positions.
Snb updates forms and instructions for irrbb reporting. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest. Hong kong monetary authority interest rate risk management. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. It generally arises from repricing risk, risks related to the timing mismatch in the maturity and repricing of assets and liabilities and off. Investors need to know which ones will best serve their needs in todays dynamic bond market. Interest rate risk in the banking book over the past decade the basel committee on banking supervision the basel committee has released a number of consultative documents discussing the management and supervision of the interest rate risk inherent in a banks balance sheet 1. The requirement imposed on all banking corporations to allocate adequate capital against all the risks in their business, including interest rate risk, is dealt.
The forms cover information on interest rate risk in the banking book irrbb based on the recording of all material cash flows according to. The changes in interest rates impact a banks earnings i. Sep 08, 2010 interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. This risk arises primarily from loans, deposits, liquid assets and tradeable instruments used to hedge banking book exposures. The basel committee for banking supervision bcbs published the final standards on interest rate risk in the banking book irrbb on april 21, 2016. The interest rate risk in banking book refers to the risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. Accordingly, effective risk management that maintains interest rate risks at prudent levels is essential to the safety and soundness of banking institutions. What is the difference between a banking book and a. Market risk encompasses the risk of financial loss resulting from movements in market prices. The standards revise the committees 2004 principles for the management and supervision of interest rate risk, which set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision.
Interest rate risk in the banking book irrbb is currently part of the basel capital frameworks pillar 2. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Interest rate risk in the banking book irrbb bankinghub. With the interest rate risk of the banking book, the basel committee on banking supervision bcbs 1 aims primarily to address the potential loss of economic value of institutions from a change in the interest rates called irr and credit spread risk csr in the banking book. Mas 637 interest rate risk in banking book irrbb migration of interest rate in banking book from fermat to rco bcbs 239 compliance standardized. Gap is the difference between the book value of the rate sensitive assets and the rate sensitive liabilities. Interest rate risk in the banking book deloitte financial. Mas issues mas notice 637 with changes relating to. Mar 28, 2012 interest rate risk in the banking book. For the trading book, specific methodologies were proposed. The book is essential reading for all those involved with interest rate risk in the banking book but particularly those working in a bank alm function who wish to gain a wider appreciation of the context in which they operate, more generalist and senior bankers who need a grasp of the fundamentals and those working in a trading risk function. Implementing bcbs 368 interest rate risk in the banking. If a bank does an interest rate swap with a customer, thats trading book. Whitepaper interest rate risk in the banking book irrbb.
Standards on the interest risk in the banking book irrbb. Changes in interest rate affect earnings, value of assets, liability, offbalance sheet items and cash flow. The net value of options under the interest rate interest rate shock scenario should be calculated using the new yield curve under. Understanding the fundamentals of irrbb and how it differs from interest rate risk in the trading book. Interest rate risk in the banking book, written by industry expert paul newson, provides a thorough guide to the new regulatory requirements surrounding irrbb and. These standards replace the principles for the management and supervision of interest rate risk from july 2004 and build up on the consultation phase. In the present value perspective, the risk is quantified as an economic value change of the total banking book cash flow in case of changes in the yield curve. Stress test 2017 final results ecb banking supervision. Interest rate risk in the banking book see practical examples of modelling approaches for eve and nii, and understand the assumptions and behavioural scenarios involved 2122 feb 2019 grand copthorne waterfront hotel, singapore. The basel committee on banking supervision bcbs issued new standards on irrbb in april 2016. Guidelines on technical aspects of the management of.
Nov 07, 2019 interest rate risk exists in an interest bearing asset, such as a loan or a bond, due to the possibility of a change in the assets value resulting from the variability of interest rates. Use features like bookmarks, note taking and highlighting while reading interest rate risk in the banking book. Video would be covering about regulatory of interest rate risk in banking books. Interest rate risk in the banking book the course will be taught in a classroom based format with a variety of professionals from the industry including, the federal reserve bank, us bank. The interest rate risk in the banking book can be measured and controlled at present value or periodically. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings, arising from adverse movements in interest rates that affect banking book positions. Interest rate risk in the banking book marcus evans. Introduction interest rate risk in the banking book or irrbbas defined by the basel committeeis the current or. Topics include a survey of the operation and development of the banking system in the u. The comments are due by december 23, 2017, with an effective date of january 01, 2019.
Irrbb definition the interest rate risk in banking book refers to the risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. Net stable funding ratio and interest rate risk in the banking book irrbb. The precise answer is both complex and involves considerable latitude for opinion. Interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits. European banking industry common understanding of credit. This in turn changes the underlying value of a banks assets, liabilities and. Interest rate risk in the banking book 2019 5th annual. Interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. This book reveals how more than three dozen experts control and preserve the value of their own fixed income portfoliosfrom choosing the right risk management product to monitoring and evaluating the effectiveness of hedge management strategies. Final bcbs standards on interest rate risk in the banking. As interest rates rise bond prices fall, and vice versa. Such unconventional monetary policy has an impact on interest rates, and therefore, requires a closer monitoring of the interest rate risk in the banking book irrbb. Two risk management metrics ecbpublic the two metrics are discussed in detail in the eba guidelines on the management of interest rate risk arising from nontrading activities and in the bcbs standards on irrbb.
When interest rates change, the present value and timing of future cash flows change. This white paper focuses on understanding how current market conditions low interest rates can affect banks revenues and profitability. Mas issues mas notice 637 with changes relating to eligible. This booklet applies to the occs supervision of national banks and. Interest rate risk is the exposure of a banks current or future earnings and capital to adverse changes in market interest rates.
The interest rate risk booklet applies to examinations of community banks. The proposed framework for interest rate risk in the banking book irrbb, to take effect from 31 december 2017, sets out pillar 2 requirements for the identification, measurement, monitoring and control of irrbb, and disclosure requirements under prescribed interest rate shock scenarios. For example, if rates were to increase and a banks deposits repriced sooner than its loans, it could result in the bank paying out more interest on deposits than the interest it is receiving from loans. The sensitivity of the financial institutions earnings or the economic value of its capital to adverse changes in interest rates, foreign exchanges. In response to the new standards, the hkma published a consultation paper regarding the proposal to update the current spm module ir1 interest rate risk management and the return of mabs12 interest rate risk exposure in june 2017. Interest rate risk in the banking book irrbb definition. Cbrc consults on revised irrbb guidelines for banks. Any changes in interest rates have an impact on the present.
Department of banking regulation reserve bank of india, central office mumbai 400 001. On 9 january 2017, mas consulted on proposed amendments to the capital framework for interest rate risk in the banking book irrbb in. Objective of the course interest rate risk in banking book irrbb objective of the course. Members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Interest rate risk in the banking book marcus evans pan. At worst, there could be an opportunity loss, but always. Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed rate investment. Interest rate risk in the banking book irrbb is the risk to earnings or value and in turn to capital arising from movements of interest rates that affect banking book positions. This article was first published as a chapter in interest rate risk in the banking book, by risk books. This booklet provides an overview of interest rate risk comprising repricing risk, basis risk, yield curve risk, and options risk and discusses irr management practices. Interest rate risk in the banking book irrbb irrbb overview interest rate risk in the banking book irrbb is the risk to earnings or capital arising from movement of interest rates. Quoting from rbi guidelines, interest rate risk is the risk where changes in market interest rates affect a banks financial position. Scenarios once the scope of the interest rate risk method has been determined, then consideration can be given to the scenarios with interest rate shocks that will be used in the. Hence, when there is a variation in the interest rate, we can easily analyze the influence of the variation on the total interest income of the bank.
Interest rate risk in the banking book irrbb interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits. Banking supervisions bcbs standard for interest rate risk in the banking book irrbb. From 9 january 2017 to 10 february 2017, mas sought feedback on the proposals set out in its consultation paper on proposed amendments to the capital framework for securitisation exposures and interest rate risk in the banking book in mas notice 637. Whitepaper implementing interest rate risk in the banking. Authority of singapore mas to facilitate its ongoing assessment of financial stability. Cbrc is consulting on the revised guidelines for interest rate risk in the banking book irrbb for commercial banks. Feb 11, 2017 what is interest rate risk in banking book.
Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. These standards are intended to replace an earlier guidance set out in the 2004 principles for the management and supervision of interest rate risk4, which laid out the principles and the methods expected to be used by banks for measuring, managing, monitoring and. Interest rate risk in the banking book, written by industry expert paul newson, provides a thorough guide to the new regulatory requirements surrounding irrbb and demonstrates the importance of good governance. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb. Subdivision 8 interest rate risk in the banking book subdivision 9 remuneration subdivision 10 composition of capital. Compliance with the basel committees standards on interest rate risk in the banking book bcbs 368 presents significant challenges to all banks with respect to measurement, calculation and hedging of interest rate risk, and this whole area is. Overview interest rate risk in the banking book irrbb.
Meeting the practical challenges moodys analytics introduction in a world of low interest rates, the thought of what could happen if there is a sudden interest rate shock. Proposed changes on irrbb interest rate risk on banking. Interest rate risk in the banking book is too dependent on the specific characteristics of institutions to enable a formalized capital requirement. Interest rate risk in the banking book irrbb is the risk of loss in earnings or a fall in the value of banking book items as a consequence of movements in interest rates. Following the publication in june 2016 of the new standards on interest rate risk in the banking book irrbb by the basel committee on banking supervision, the deloitte emea irrbbalm working group invited european and south african banks to participate to an online survey to assess their current state of readiness against the new basel standards. The business support and analysis team works with treasurers to.
Guidelines on technical aspects of the management of interest. Interest rate risk in the banking book exists in balance sheets across citi and the irr team covers the global citi balance sheet. The objective of this book is to describe the impact on banks of changes to the general level interest rates and, to a lesser extent, changes to other market prices. Interest rate risk is a catchall phrase for the effect of changes in market interest rates on banks financial conditions. May 12, 2018 members treasury consulting llp pleased to present video titled interest rate risk in bank books irrbb. Excessive irrbb can pose a significant threat to a banks current capital base andor future earnings if not managed appropriately. Framework for securitisation exposures and interest rate risk in the banking book in mas notice 637 monetary authority of singapore 3 1 overview 1. Interest rate risk in banking is the potential negative impact on the net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. Interest rate risk in the banking book faq 7 whilst allowing firms to strike a compromise between net interest income sensitivity and economic value sensitivity that cannot be simultaneously cancelled out. The new framework replaces its previous version from 2004 and sets out nine principles for banks and three principles for supervisors for the management and supervision of irrbb.
Market risk is rated based upon, but not limited to, an assessment of the following evaluation factors. Monetary authority of singapore mas notice to banks. Any changes in interest rates have an impact on the present value of future cash flows on the bank. As a result, the fed has a strong interest in topics such as interest rate risk. The sensitivity depends on two things, the bonds time to maturity, and the coupon rate of the bond. Download it once and read it on your kindle device, pc, phones or tablets. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve parallel risk or differentially by period nonparallel risk. Differences between interest rate risk irr in the banking. As for the banking book, only in july 2004 the principles for the management and supervision of interest rate risk provided some guidance on how to evaluate its interest rate risk. Nov 28, 2016 with the interest rate risk of the banking book, the basel committee on banking supervision bcbs 1 aims primarily to address the potential loss of economic value of institutions from a change in the interest rates called irr and credit spread risk csr in the banking book 2. Interest rate risk in the banking book zanders treasury. Interest rate risk in the banking book monetary authority of.
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